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Factors affecting the choice of location of a firm

Near to the Market

The most important factor affecting the location of a firm is the nearness to the market. Every business wants to be near to its customers. This is especially true for retail businesses.

Near to the raw materials

In case of manufacturing firm it is more economical to locate near to the source of raw material. This results in low transportation cost.  If the output of the firms is more expensive to transport than its input, it is a bulk decreasing industry and is more likely to locate near to the market. For example, brewing industries locate near to the market because it is expensive to transport finished product.

On the other hand, if the raw material used by the firm is bulky and expensive to transport, it is a bulk decreasing industry. In this case, the firm would locate near to the raw material.

Supply of labour

If a firm requires skilled labour, than the location decision might be affected by availability of skilled, cheap labour. Many multinational firms are locating their production facilities in South East Asian countries just because the labour is cheap in these countries.

Availability of cheap land

Firms which need large areas of land might consider cost of land before locating. Automobile manufacturing plants need large chunks of land.

Traditional locations

Locating in an area that contains similar businesses, suppliers and markets may also be a considerable advantage. In Indonesia, most of the wood craft businesses prefer to locate in Bali because of its long reputation of producing excellent wood craft.

Amenities

Basic amenities such as gas, electricity, water, waste disposal and drainage may also be considered.

Climate

Many production processes may be affected by the climatic conditions also. Chip manufacturers prefer to locate in dry areas, e.g. Silicon Valley.

Safety requirements

Some products may be hazardous for the community and thus need to be located away from high density population. For example, Nuclear power plants, Chemical plants.

Management’s Preference

In many cases the location of a firm may be influenced by the likes and dislikes of its management.

Government’s Influence

Government also influences the location decisions of the firms. Government may give special incentives to firms which locate in underdeveloped or high unemployment areas of the country. These incentives may be in the form of Tax holidays, subsidies, cheap land etc.  A firm in order to harness these incentives may locate in these regions.

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